The Retail Quagmire Of Virtual Goods Fraud

Written by Frank Hayes
June 24th, 2010

How should retailers deal with virtual goods when it comes to fraud? When the product is music, video, gift cards, news stories (such as the one you’re now reading), applications or anything else lacking a box that can be signed for, the issue of proving the item’s delivery becomes much more treacherous. And that’s a vulnerability some fraudsters are not shy about trying to exploit.

Case in point: Apple’s customers love Apple. They love iTunes. And Apple would love to make iTunes something more than just a way to sell music, movies, apps and gift cards. In fact, Apple wants to be a major M-Commerce payment player, especially for other retailers selling virtual goods.

But Apple has a problem: recurring complaints from customers who say someone has fraudulently made purchases through their iTunes accounts. And when it comes to fraud, Apple treats its virtual-goods business exactly as if it were shipping physical hardware. Its approach has generated ill will toward Apple that is probably much greater than the actual fraud problem. And that customer unhappiness could easily spill over to any other E-tailer handing off payments (and the handling of payment fraud) to iTunes.

On its face, Apple’s official statement on iTunes fraud is conventional enough: “If your credit card or iTunes password is stolen and used on iTunes, we recommend that you contact your financial institution and inquire about canceling the card and issuing a chargeback for any unauthorized transactions. We also recommend that you change your iTunes account password immediately.”

There’s an irony here. Apple’s customers expect simplicity and elegance. They believe Apple’s products will “just work.” When an iTunes customer’s account is used fraudulently, that customer see it as an iTunes failure. Security didn’t “just work.”

And then when the customer faces the traditional process of challenging the credit-card charge, that makes him feel like he is being required to do the work for what he sees as a security failure on Apple’s part. There’s also a valid question: Does it make any sense at all for Apple to treat virtual-goods fraud the old-fashioned way? After all, when a customer claims fraud, a standard question in the card-issuer’s investigation is whether the merchant can prove the goods were delivered to the customer.

With virtual goods, that’s practically impossible. “Merchants always eat it,” said Gartner security analyst Avivah Litan. “There’s no method to prove delivery that the banks will accept. Digital merchants are screwed.”

But if Apple and other E-tailers of virtual goods are always bound to lose, why make customers jump through conventional charge-challenging hoops? That question gets more pointed when it’s paired with another question: Why do thieves go after virtual goods in the first place? Most virtual goods–movies, TV shows, music and e-books–are secured with DRM. They are impractical to resell. Why go through the substantial trouble to steal them in the first place?


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Why Did Gonzales Hackers Like European Cards So Much Better?

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The marketplace does speak. More fraud capacity translates to higher value for the stolen data. Because nearly 100% of all US transactions are authorized online in real time, we have less fraud regardless of whether the card is Magstripe only or chip and PIn. Hence, $10 prices for US cards vs $25 for the European counterparts. Read more...
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